Front-Running
The illegal practice of trading on advance knowledge of a pending client order to profit from the anticipated price move.
What is Front-Running?
Front-running is an illegal practice in which a broker, trader, or advisor executes trades for their own account based on advance knowledge of pending client orders, exploiting the anticipated market impact of those orders. It violates fiduciary duty and securities laws, including SEC Rule 10b-5. Front-running can occur in equities, options, and commodities markets and is actively monitored by FINRA and the SEC through trade surveillance systems.
Example
A broker who learns a large institutional client is about to purchase 1 million shares of a small-cap stock secretly buys 50,000 shares for their personal account first. After filling the client's large order drives the price up, the broker sells at a profit — a clear violation prosecuted by the SEC and FINRA.
Source: SEC — Front-Running Cases